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May 21, 2007

Florida: Playing the Percentages on Property Tax Reform

With about three weeks left to go before a scheduled special Florida legislative session on property tax reform, a joint House-Senate committee is listening to new ideas about how to reform the state's homeowner property tax breaks. The idea of the day: percentage-of-value homestead exemptions.

It's a simple idea. Right now, most Florida homeowners get to exempt the first $25,000 of potentially taxable value from all property taxes. From the cheapest shanty to the most expensive mansion, every home gets the same basic exemption. But several proposals discussed in today's hearing would change the homestead exemption from a flat-dollar amount to a percentage of a home's value.

To see the impact of such a change, take two neighboring homes: one valued at $100,000 and the other valued at $1 million. The current $25,000 exemption provides the same dollar amount of tax cut for the houses. But a percentage-of-value cut of, say, 25%, would give the low-valued house a $25,000 exemption (the same as it gets now) while the higher-valued house would get a $250,000 exemption-- ten times as big as the poorer house.

As this example indicates, the big winners from such an approach would be owners of expensive houses-- hardly a tax-fairness strategy that most lawmakers would champion.

But lawmakers also heard two wrinkles on this broad plan today that would allegedly make the percentage-of-value homestead less unfair. One idea would apply lower percentages to higher-valued houses. In the previous example, the higher-valued house might get an exemption for 25 percent of value up to a certain amount (say, $300,000 of home value) and then an exemption for 15 percent of all value above that. This would still leave the wealthy homeowner better off: their exemption would be $180,000 under this approach (25% of $300K is $75,000; 15% of $700K is $105,000), which is more than seven times higher than what the lower-income homeowner would see in tax cuts.

So it's less unfair than a simple percentage-of-value exemption-- but not by much. And this sort of exemption certainly wouldn't be the most transparent approach to property tax cuts. (Although by comparison to the much-lamented "Save our Homes" tax break, it sounds remarkably straightforward.) And neither of these proposal would do much to target property tax breaks to those homeowners who are truly (to coin a phrase) in danger of being taxed out of their homes. Got a home? You'd get a tax break.

The second twist on this basic tax cut proposal heard by lawmakers today would vary the percentage exemption not by the value of the house but by its geographic location. The bigger a district's median home value, the bigger that district's homestead exemption would be. This approach is certainly a refreshingly new approach to inequitable property tax cuts, but is inequitable nonetheless. Reserving the biggest property tax breaks for the wealthiest areas will be cold comfort for fixed-income families living in less-wealthy districts who are nonetheless simply unable to pay their property tax bills-- and will provide a huge boon for many upper-income families who simply don't need such a tax break.

Florida wouldn't be the only state with such an upside-down property tax break. The New York Fiscal Policy Institute's Frank Mauro has beaten the drum convincingly for years to get rid of a similar, poorly-thought-out homestead exemption in New York called the STAR program. As ITEP pointed out in a 2005 study, providing bigger exemptions to wealthier districts creates inequities that are hard to justify:

[T]wo homeowners with the same income and the same home value can receive dramatically different exemptions simply because they live in different counties.

Unjustifiable discrimination between the tax treatment of identical houses is nothing new in the home of the Save our Homes tax break, of course-- but that's no reason to try it a second time.

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The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state - Adam Smith, An Inquiry Into The Nature and Causes of the Wealth of Nations, 1776